The chairman of Barclays says Europe needs an investment banking colossus to compete with America

European investment banks should merge to create a regional champion to take on US rivals, according to the chairman of Barclays.

John McFarlane, who has been in charge of Barclays since former CEO Antony Jenkins stepped down earlier this year, said "you would have to combine the investment banking arms of the main players, but you would have to swallow really hard and you would need political support" in an interview with the Financial Times.

European investment banks have been hit with tough capital requirements, as well as restrictions on bonuses and a possible financial transaction tax that would make them less competitive than US banks.

Europe hasn't seen a big banking merger since Royal Bank of Scotland bought Dutch bank ABN Amro in a disastrous deal signed as the credit crunch was taking hold in 2007.

RBS edged out Barclays to seal that deal, so the bank is no stranger to big deals. Barclays went on to try to buy Lehman Brothers at the height of the 2008 financial crisis in a move that was stopped by the UK regulator at the time - the Financial Services Authority.

European regulators, particularly in the UK, have taken the view that investment banking and retail banking should be split and are preparing tougher rules.

European banks have been losing out as a result as this chart from Morgan Stanley shows:

As McFarlane says, a deal to create a huge European investment bank would need political will and that's very unlikely at the moment.

Banking mergers helped lead to the government bail-outs of 2008 and no politician or regulator will want to see a return to that sort of debt-funded deal-making.